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Income Tax (IT) benefit of an education / study loan – Section 80E

This article explains how you can save income tax under section 80E if you have availed of an education / study loan. It also tells you the nitty gritties: what is the process, how much you can save, who can benefit from this, etc.

[This article has been inspired by queries from readers Ravi Gunti and Subramanya]

Get educated, save tax!

We know that a home loan can help you save tax.

(Want more details? Check out “Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage”)

So, is there any other loan that can help you save tax? Well, there is – an education loan or a study loan.

That’s right! When you take an education loan for pursuing higher studies, you not only acquire a great degree, but also save income tax while repaying it!

(Income tax benefit for an education loan is available under section 80E of the income tax act).

 

How much tax can you save?

The entire interest that you pay on your education loan is deductible from your income. There is no upper limit to this amount – you can deduct the full interest paid during the year from your income of that year.

Thus, you can save upto 30% of this amount as tax – depending on which income tax bracket you fall into.

(Want to know the current tax slabs? Please read “Income Tax (IT) Slabs / Brackets – FY 2008-09 AY 2009-10”)

Please note that there is no tax benefit available for the principal that you repay.

(Earlier, you got a deduction for both the principal and the interest, but there was a limit of Rs. 40,000 on the amount that you could deduct. Now, you can claim only interest, but without any cap).

Remember – the income tax benefit available for a study loan u/s 80E is separate and distinct from the tax benefits available under section 80C. This benefit is over and above the benefits of section 80C.

(To know more about section 80C deductions, please read “Saving Income Tax – Understanding Section 80C Deductions”)

 

When is the income tax benefit available?

The tax benefit under section 80E is available from the year in which you start repaying your education loan.

It is available for a total of eight years – the year in which you start the repayment, and seven years following it.

If your loan repayment is for more than 8 years, you would not be able to claim deduction of the interest paid from the ninth year onwards.

 

Who gets the tax benefit?

The person availing the loan gets the tax benefits, provided the loan is taken for:

  • Self
  • Spouse, or
  • Children

Thus, if you take an education loan for yourself, you would get the tax benefit. You would get the tax benefits even if you take the loan for your spouse or kids.

Also, if you take the loan for your son or daughter, you would get the tax benefit – not your son or daughter.

(Till some time back, the tax benefit was available only if you took the loan for yourself – loans for spouse and children were not allowed u/s 80E).

Education loan taken for siblings (brother / sister) or other relatives (in-laws, nephew, niece, etc.) would not qualify for section 80E benefit.

 

Other important considerations

Source of the loan

You need to have taken the education loan from a financial institution (this includes banks) or an approved charitable institution. A loan taken from your employer, family or friends would not be eligible for deduction u/s 80E.

Source of the income

The loan repayment has to be from your taxable income of that year. If you repay the loan from your savings or from money received from someone, you would not get the income tax benefit.

Courses eligible

The deduction under section 80E is allowed only for education loans taken for graduate or post graduate (PG) courses in engineering, medicine and management, or for post graduate courses in applied pure sciences (including mathematics and statistics).

The course that you enroll in has to be a full time course – tax benefit is not available for part-time courses.

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